Beating Broke

Personal Finance from the Broke Perspective

Knowing Your Debt is Key to Paying Off Your Debt

By 7 Comments

Any good anti-debt blogger (like me!) will be able to tell you all kinds of ways to pay off your debt.  There’s methods, and tips, and even a certain way to hold your nose. Ok, maybe I’m kidding about that tips bit.  Or is it the nose part?  I’m confused.  Seriously though.  There’s a debt snowball, made famous by Dave Ramsey, then a debt avalanche, then a debt blizzard, and so on.

But, the one key thing that you absolutely have to have if you want to pay off your debt is knowing your debt.  You’ve got to know the number, the type, and even the method of your debt.  If you want to overcome your debt, you’ve got to know it inside and out, upside and down.

How Much Debt

Just how much debt do you really have?  If you’ve do a budget regularly, (if not, start) take the time to write down how much you owe to everything you make a payment to.  Keep in in a spreadsheet and update it periodically.  Put a big bold total across the bottom.  Is it a high number?  Use that as motivation to pay it down.  Is it a low number?  Use that as motivation to finally get rid of it all!  Watch the total get smaller and smaller.  (If you’re an spreadsheet junkie, create a line graph for the total!)

What Kind of Debt

There’s a common argument over whether there is any such thing as good debt, or if it’s all bad debt.  I happen to think that argument is a little too black and white and that it really depends on your situation.  If you know how much debt you have (see above), now you can categorize it.  This really isn’t as hard or as complicated as it sounds.  We’re talking simple categorization here.  Is the debt on a credit card?  It’s credit card debt.  A mortgage?  Mortgage debt.  Car loan?  Car debt.  Put them all in a category, and total the categories.

How Did you Get Your Debt

This is going to sound silly, but now take a hard look at your debt and decide how you got it.  Some of it will be obvious.  You got that mortgage debt by buying a house.  The car loan by buying a car.  But, I also want you to go a bit further.  Did you buy that car (or the house) because you absolutely needed a car?  Or did you buy it because you had gotten bored with the old one?  Categorizing your credit cards this way will be a little harder.  It might be easiest to go through old statements and look at purchases.  What are those purchases?  If you’re buying groceries and other small priced consumables on your credit card, but not paying those charges off right away, that’s a good sign that you have a problem.  Determine why you’re spending the way you are, then find a way to fix it.

Now, Get Rid of Your Debt

someecards.com - Nothing gets me hotter than a man devoid of debilitating long-term debt

Now you know how much debt you have, what kind of debt it is, and how you got it. Let’s get rid of it.  If you’re comfortable sharing your totals (even anonymously), joining something like the debt movement can be a great help.  There’s tools out there that can help you, like Ready for Zero.  If you want to go it alone, here’s a simple method for starting.  Go back to the list of categorized debt.  Start with the category(-ies) that are un-secured (that means they have no asset like a car or house tied to them) and start paying those off with every spare penny you have. You can sort them largest interest rate to lowest interest rate, or smallest balance to largest, or however you want, really.  Just start paying them off.  Get them taken care of, then start on the smallest of the secured (tied to assests) debts.  Rinse, recycle, reuse, repeat.

If you feel like sharing, tell us in the comments below how much debt you have.  How much have you paid off?

The Debt Movement

By 7 Comments

I often get asked why I started this site.  And my response is always that it was a great way for me to share some of the things that I was learning as my wife and I struggled with our debt.  All of the things that we were learning through books, trial-and-error, and online that helped us, I tried to fold into some post here.  My goal in sharing these things has always been two-fold.  The first part is that I wanted someplace to record what I was learning.  The second part, and the part that keeps me writing here, is that I wanted that information to help someone else.  The more places it can be found online, the better.  I’ve always felt that it has a bit more weight when it’s coming from someone who’s lived (lives) it.  Nearly 5 years into the life of this site, we still struggle with debt sometimes.  We still have lots to learn.  Today, I’m going to share something that I think has the potential to change a lot of peoples lives.  It’s called the Debt Movement.

The Debt Movement is the brain child of Jeff Rose. Last year, he brought us the Roth IRA Movement, and the Life Insurance Movement.  Both of those were meant to bring the entire personal finance blog community together to talk about one subject on one day.  I think both went very well.  Jeff has raised the bar a bit this time around.  The Debt Movement isn’t just about educating readers on a subject.

What is the Debt Movement?

It’s a 90 day challenge.  Officially, it starts on February 1st, 2013 and will run for 90 days.  Participants, like you and me, are challenged to aggressively reduce our debt over that 90 days.  The goal is to help people payoff Ten Million dollars worth of debt in those 90 days.  It’s a lofty goal, but I think it can be done!

In addition to the challenge, Jeff has rounded up a group of sponsors who are sponsoring a Debt Movement Scholarship.  As of right now, the total is around $10,000 and is likely to grow as the movement gains speed and gathers new sponsors.  There’s an application process, as well as a few rules, but certainly something to look into.

Jeff has also partnered up with Ready For Zero.  Ready for Zero is a company that has created some pretty sweet tools for paying off debt.  Once you’ve signed up, you can enter in all of your information, along with payments, interest rates, and balances, and their software magically (or mathematically, I can never keep them straight) puts together a debt payoff schedule for you.

What do you say?  Will you come along on this journey?  Let’s pay off some debt together!

Reducing Your Debt: Much Better than a Snowballs Chance

By 10 Comments

Credit card debt, mortgage loan, car payments, tuition…all of these add up to your debt and debt means stress in any economic environment. Like a lot of folks, you probably haven’t defaulted on your debt but it’s hard to keep up on and while there are a lot of plans to pay down cards by paying a little extra each month, it doesn’t move quickly. Paying the minimum payment on those debts doesn’t get you anywhere.  It’s time to stop sending the minimum payment to your debts… sort of.

Get the Debt Snowball Rolling

Snowball
credit: ff137 on flickr

I’ve written before about using a snowball plan for pay-down. You can read one of my favorites here: Debt Avalanche, Correct?  If you aren’t familiar with how the debt snowball works, here’s a run-down. Add up all the extra you pay on your debt and apply it to your smallest credit card. Keep paying that extra to the card and your payments are going to start making a big difference faster than you would believe. Once that card is paid off, apply that extra and the payment you regularly made and apply it to the next largest loan or card. Here comes the hard part; as you pay off credit cards, cut them up. You don’t have to cancel immediately, and possibly shouldn’t for credit score reasons, but once your debt to income ratio is more manageable you may want to consider it. The goal is to quit being eaten by small payments and start making big payments.

Stop Paying So Much Interest

Step number two is adding an extra payment per year to your mortgage loans. This shaves 10 years from your mortgage through the elimination of interest. There are two ways to do this. Your mortgage lender probably has some type of offer available that lets you pay every two weeks instead of a monthly mortgage. Because of the various five week months, this effectively creates a 13th payment for the year, but once you commit you might struggle to get back to a monthly payment.

To stay in control of the extra payment you could simply mail an extra payment at some point in the year with bonus money, but a more comfortable way is to take your payment, divide by 12 and add that amount to your monthly payment. It’s a much more painless proposition that still adds up to an extra payment and ultimately gets more money paying toward your principal. Caution: This is only appropriate if you plan to stay in your home or if you have an equity goal in mind. If you are trying to sell your home, this may not be the wisest option.

The same is true of car payments. If after the credit card and personal loan debt is paid, you may be tempted to pay off your car. If you do not plan to buy another and are hoping to be payment free, this will absolutely work as rapidly for a car payment as for credit cards, loans and your mortgage; however, if you are considering a trade-in, keep the extra money you would spend on your car payment and start putting it to work for you in an IRA!